Chile's economy and the 'Chicago Boys'

ByManuel E. Yevenes, Manuel E. Yevenes, formerly a foreign service officer of Chile, is a doctoral candidate in political science at the University of California, Santa Barbara.December 21, 1982

Nine years after the military coup, the Pinochet dictatorship in Chile is facing its worst economic crisis. Part of the rise in foreign debt went to finance a pet policy of the ''Chicago Boys,'' as the government economists are called by the media in Chile. This was the elimination of trade barriers lowering all tariffs to a maximum of 10 percent. Imports became so much cheaper that the buying of consumer products from the United States, Europe, Taiwan, Hong Kong, and Korea meant the expending of billions of dollars. At least 50 percent was financed by short-term loans from the large international banks operating the Euro-dollar market. The rest was paid for by the vigorous promotion of exports.

By 1980, the international money market became difficult owing to increasing interest rates, a slowdown on the deposits by OPEC countries, and the ever-growing number of borrowers. With a recession in the US, Chilean products lost their major market, and, with an extremely tight money supply at home, Chilean industry went bankrupt. In November 1981 four banks and four major finance corporations went under, obliging the government to move away from its emphasis on private enterprise. Government intervention was necessary to back up other banks and corporations ready to go under.

Threatened with political instability, the military government was forced to at least partially phase out the Chicago model and replace it with a new set of policies.

First among them was to devalue the peso by 18 percent, and the decree of free float a couple of weeks later further devalued the Chilean currency by 55 percent. A blow to the government's credibility considering that, a few days before, the minister of economics had assured business and the public in a major televised speech that the Pinochet regime was committed to Chicago economics and that devaluation was unthinkable.

Second, the government was obliged to intervene in the production of goods and services because more than 1,300 large industries have defaulted since January 1981.

Third, a loosening of the money supply was decreed to prevent further unemployment, which even before the current crisis was over 20 percent. An increase in it would probably have a determining effect on the stability of the regime.

People are now bolder in speaking against the military's economic policies, and the Chicago Boys hold no credibility among industrialists. Workers and the underground opposition have always scorned the model as totally unsuitable for the needs of an underdeveloped economy like Chile's.

The situation is now much worse than it was in 1970, during the government of the Christian Democrats that the miltary and right-wing ideologues had criticized in their harshest terms.

Recently the President announced to the nation far-reaching reforms that will return the country to an economic situation fairly similar to the one existing in the 1960s. Among the new measures, there is a trend to increase tariffs to protect the surviving domestic industry, just as the Christian Democratic administration did to implement the ''imports-substitutions'' model being tried then. The events signal the end of the experiment initiated by the Chicago economists and their perspective of an economic system functioning in a vacuum from the political and social forces that shape societies. The Pinochet dictatorship had made an article of faith out of the Chicago gospel, and its rejection will strengthen the opposition.